Without Kevin Spacey or New Equity, Relativity Now Must Face Judgment Day

Relativity Media doesn’t have the $100 million it initially pledged to raise in new equity, or even its $20 million fall-back promise. It has signed on only the less-famous half of the two-man executive team it said would lead the company into the future. Yet representatives of Ryan Kavanaugh’s company will ask a judge Friday to let the embattled studio emerge from more than seven months in bankruptcy.

Throughout the process, the company has repeatedly claimed that new funding is just around the next corner, only to have deals fall through or fail to materialize. This time is different, it claims. In court filings over the weekend, attorneys for Relativity have assured U.S. Bankruptcy Court Judge Michael Wiles that the money needed to keep it afloat will end up in the bank.

Relativity’s lawyers want Wiles to confirm that Relativity’s reorganization plan is adequate, though less than previously advertised. Among the changes it’s asking the judge to live with is the departure of Kevin Spacey, after the Oscar-winning actor opted not to sign on as chairman of the company, publicly claiming his schedule was too full. Last month, Relativity enlisted Spacey to tape a message to Wiles urging the court to let the studio out of Chapter 11 protection and declaring himself “enormously excited” to take the reins.

Relativity did secure a deal for Spacey’s partner, producer Dana Brunetti, to come on board as president of Relativity’s motion picture and television group, and forged a licensing deal with Trigger Street, the pair’s production company. In addition, the studio replaced a $20 million equity pledge with two loans — one for $40 million from Midcap Financial Trust and the other, for $35 million, from Kavanaugh’s co-chief executive, investor Joseph Nicholas.

The bottom line of Relativity’s modified proposal is that it would emerge from Chapter 11 with a much higher level of debt than the company previously forecast. A bankruptcy court filing shows more than $314 million in total debt following the company’s presumed March 19 exit from bankruptcy. That is more than 10 times the debt load of $30 million that Relativity projected it would carry in an October press release. A month later, a Relativity spokesman pegged the post-emergence debt at $60 million or less.

Such an outcome might be problematic, since Relativity filed for bankruptcy protection last July 29 after it could not repay $320 million in obligations. An auction for the entire company then fizzled, with senior lenders the only bidders, offering $125 million for Relativity’s TV unit.

Relativity will need to maintain sufficient cash flow to keep servicing its debts as it ramps up production and distributes unreleased films. It is currently projected to repay $57.8 million in debts in 2016, $9.3 million in 2017, and $31 million in 2018, according to financial estimates filed with the court.

“Most companies owe some debts, and there’s nothing wrong with that,” said Mark S. Scarberry, a professor of law at Pepperdine University. “The question is do they owe too much debt relative to the overall value of the company and the type of industry they are in?”

He went on to note that unlike other businesses, in the film industry it can be difficult to project future revenues. Have one blockbuster and it can paper over losses, but finding the diamond in the rough is a challenge that Scarberry likened to “wildcatting for oil.”

In order to allow Relativity out of bankruptcy now, the law requires Wiles to determine that “confirmation of the plan is not likely to be followed by the liquidation” of the company or by “the need for further financial reorganization.”

“Judges generally like to see plans confirmed,” said Keith Owens, a partner in Venable’s bankruptcy practice. “A lot of work has gone into this.”

Owens added that, if the plan is endorsed by the creditors committee, which it previously has been, it will likely be approved.

The new Relativity, as envisioned by its owners, finds a considerably happier ending than it did in the company’s most recent incarnation. That’s partly due to the fact that it projects rosier prospects for its feature films.

Previously, the studio slumped into the red with films like the Liam Hemsworth thriller “Paranoia” and “Machine Gun Preacher,” with Gerard Butler as a one-time biker who rescues child soldiers. As a result, the company reportedly lost $135 million in 2013 and $118 million in 2015.

In contrast, a filing to the bankruptcy court last weekend optimistically predicted that Relativity’s next 22 films over three years will all be profitable. Some of these projects have yet to be determined or are proposed sequels to films such as “Act of Valor” and “The Immortals.”

“In many cases Chapter 11 debtors will prepare optimistic projections and those will be scrutinized by the court and by the creditors committee,” said Owens.

It’s not clear how far along Relativity’s team is in developing these projects, particularly as most of the company’s former executives have left and Brunetti needs to staff up following the bankruptcy. He is expected to bring his team over from Trigger Street and will also hire new talent.

One of Relativity’s principal outside financial consultants, with the firm of Houlihan Lokey, predicted last month in court that, once the “noise” of the bankruptcy has faded into the background, there will be a “feeding frenzy” of investors ready to put money into the new Relativity.

It remains to be seen Friday whether Judge Wiles believes the absence of Spacey and of an immediate new equity infusion are significant enough changes in Relativity’s reorganization plan to cause further delay, or an outright rejection of the plan.

It’s not likely there will be much overt opposition in court to Kavanaugh’s proposal. That’s because the company previously settled objections from dozens of creditors, lenders, producers and others. Many apparently made the calculation that they can gain more via a reorganization than a liquidation of the company, which the earlier auction showed had few assets of value on the open market.

Ultimately, only Netflix pushed hard for the bankruptcy court to reject the reorganization. It remains unclear whether the giant streaming service plans to press its case at Friday’s hearing. Though Judge Wiles gave voice to some of the same questions as a Netflix lawyer – requesting proof of financing and a signed deal with Spacey and Brunetti — he said the Relativity opponent had erred by failing to press those concerns earlier in the case.

Several creditors said privately that the parties and Wiles had invested so much time in plotting a reorganization that they doubted the judge would now prevent Relativity’s reorganization, with the finish line in sight.

“They almost had the money. They almost had Kevin Spacey,” said a lawyer for one creditor, who asked not to be named. “But they have come this far. I think [Judge Wiles] is going to let them sneak over the line.”

Previous stumbles have made many in Hollywood skeptical about predictions of future Relativity success. A year prior to its bankruptcy, sources floated the idea that the company would make a public stock offering that it would value Relativity at up to $10 billion. Then, prior to last October’s bankruptcy auction, Brian Kushner, a company adviser from FTI Consulting, predicted “an exciting bidding process and a lively auction.” Instead, there was not a single offer for the entire company.

FTI and Relativity later became embroiled in a fierce dispute. The consulting firm’s principals said Kavanaugh had obstructed their work and did not have a realistic view of the value of his company. Kavanaugh said the consultants had overstepped their authority, leaving the Relativity CEO and his board out of important decisions. The feud came out when Relativity tried to deny FTI some of its unpaid fees.

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